Question

Explain why changes in the level of interest rates will influence economic growth. Analyze the relationship between interest rate changes and consumer's ability to stimulate an economy through spending.

Answer 1

Interest rate earned in the savings are the opportunity cost of spending. If the interest rate rises the opportunity cost of spending rises and people will save more. If the interest rate is low the opportunity cost of spending is low and people will spend less.

IF the spending is high an increase in the interest rate will force people to save more and that will decrease the demand and output in the market. If the consumption is low a decrease in the interest rate will increase the consumption. SO, when the demand is low the Fed decreases the interest rate and vice versa.